As their fixed-rate loan term ends in 2023, hundreds of thousands of Australian homeowners will see a 65% increase in their monthly payments.
Borrowers took advantage of house loan rates of 2% or lower during the record-low 0.1% interest rate period of 2021.
However, according to the Reserve Bank of Australia, more than 800,000 loans that were temporarily locked at such very low interest rates will expire in 2023.
The Big Four banks—ANZ, Commonwealth, NAB, and Westpac—offered fixed rates that averaged 1.92 percent back in May 2021.
According to RateCity, consumers who fixed their loan for two years at that rate risk having it suddenly change to a 7.18% default variable rate in three months.
An expert has warned of a “mortgage jail” as tough restrictions make it more difficult for Australians to refinance, which would mean that a borrower with an average $600,000 mortgage would face an overnight $1,645 increase in their monthly installments.
Risky borrowers include those who took out loans with deposits of less than 20% and overstretched borrowers who had been unable to achieve a fair wage raise.
Additionally, homeowners who purchased homes at the pinnacle of the market run the risk of having negative equity, or owing more on their house than it is now worth.
In the small print of the loans that borrowers took out in 2021, it was stated that once their two-year fixed term ended, they would switch to a default “revert” variable rate with a three in front of it.
That reversion rate, however, was predicated on the cash rate staying at 0.1 percent.
Westpac and ANZ predict that the cash rate will reach 3.85 percent by May of this year as a result of the Reserve Bank’s three percentage point increase since then.
Borrowers would then switch to a reversion variable rate that was 3.75 percentage points higher than what their small print stated over two years before.
If the RBA were to increase interest rates three more times, RateCity predicted that the reversion rate for borrowers exiting a two-year fixed rate in May 2023 would be 7.18 percent.
A borrower with an average mortgage of $600,000 would see a rapid rise in monthly payments of 63% to $4,163, up from $2,518 under the previous fixed rate on a 25-year loan.
For loans up to $750,000, the average revert rate with a Big Four bank would be 7.18 percent.
Due to NAB’s somewhat lower rates for larger loans, this would drop to 7.16 percent for larger mortgages.
A working couple with a $1 million mortgage would experience a $2,733 rise in their monthly payments, going from $4,197 to $6,930.
Those debtors who hadn’t had an increase in salary over the previous two years would be especially at danger, according to RateCity research director Sally Tindall.
She told Daily Mail Australia, “If they borrowed every single dollar from the bank back in 2021 and they haven’t received a substantial wage boost in that time, they may not satisfy the bank’s new serviceability standard.”
‘Hopefully, individuals are ready and have been making additional loan payments while the sun has been out, but other people will be caught off guard,’ said one person.
Some borrowers could discover too late that they won’t be able to climb this cliff when it reaches them.
Then there are the borrowers who purchased during the boom only to see significant price drops, perhaps leaving them paying the bank more than their property is worth and making it more difficult for them to refinance to a variable rate at a lower cost.
People who just purchased a home, overextended themselves to enter the housing market, may have had a tiny initial deposit, and borrowed as much money as they could from the bank would find it difficult to refinance, according to Ms. Tindall.
Less than 20% mortgage deposits made it more difficult for borrowers to qualify for a lower variable rate since they had to spend thousands of dollars in lender mortgage insurance.
They have few alternatives, that much is evident, she remarked.
Under Australian Prudential Regulation Authority guidelines that took effect in November 2021, lenders must determine a borrower’s capacity to handle a three percentage point rise in variable mortgage rates.
According to Ms. Tindall, stiffer lending regulations would make it more difficult for a stretched borrower transitioning from a fixed rate to find a new bank that would provide a better deal.
She said that the three percent stress test would probably prevent some individuals from refinancing.
They can discover that they are trapped with their existing lender, or in what we refer to as mortgage jail.
You won’t be subjected to such serviceability tests if you renegotiate with your own bank, the bank said.
It was a test that was far simpler to pass while rates were at record lows, but if you refinance to a new bank or lender, they have to put you through one.
Borrowers with a 20% or higher equity interest in their property are more likely to be able to refinance at a reduced variable rate or switch banks to benefit from a lower introductory rate for new clients.
They could negotiate a 5.25 percent variable rate, which would be the lowest among the large banks should rates increase three more times, as opposed to paying 7.18 percent interest in May 2023.
An typical borrower with a $600,000 mortgage would pay $3,510 per month rather than $4,163, which would result in a $653 savings.
Now of paying $6,930 a month, a couple with a $1 million mortgage would instead pay $5,850, saving them $1,080.
Lenders are now keenly aware of the refinancing boom, not only as a chance to gain new clients, but also as a danger since they risk losing clients to rivals, according to Ms. Tindall.
According to recent Australian Bureau of Statistics statistics, refinancing among both owner-occupiers and investors almost reached a record high of $19.1 billion in December.
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